Alfred Chandler, the great business historian, died in May. One of his many achievements was to highlight the way technology influenced the organization of corporations. Chandler realized that “the railroad and the telegraph, the steamship and the cable” had made it possible for companies to grow to a vast scale. That in turn meant handing control of the corporations over to professional salaried managers in place of owner-entrepreneurs.
Naturally, the story did not end with the railroad and the telegraph. Economists believe that technology and business performance shape each other. If history is any guide, the impact of the latest technologies on business organization is likely to be vast; it is also likely to be more gradual than the rolling hype of the last decade suggests.
Paul David, an economic historian at Stanford, presented a brief, prescient research paper to the American Economic Association back in 1990, titled “The Dynamo and the Computer.” Professor David’s aim was to persuade economists that the history of the electric dynamo would tell them something about the ongoing information revolution.
Electric light bulbs were available by 1879, and there were generating stations in New York and London by 1881. Yet a thoughtful observer in 1900 would have found little evidence that the “electricity revolution” was making business more efficient.
Steam-powered manufacturing had linked an entire production line to a single huge steam engine. As a result, factories were stacked on many floors around the central engine, with drive belts all running at the same speed. The flow of work around the factory was governed by the need to put certain machines close to the steam engine, rather than the logic of moving the product from one machine to the next. When electric dynamos were first introduced, the steam engine would be ripped out and the dynamo would replace it. Productivity barely improved.
Eventually, businesses figured out that factories could be completely redesigned on a single floor. Production lines were arranged to enable the smooth flow of materials around the factory. Most importantly, each worker could have his or her own little electric motor, starting it or stopping it at will. The improvements weren’t just architectural but social: Once the technology allowed workers to make more decisions, they needed more training and different contracts to encourage them to take responsibility.
David showed that World War I, which led to immigration controls and choked off the supply of cheap but untrained immigrant workers, was one of the spurs to make these changes. U.S. productivity growth eventually leapt in the 1920s, four decades after the commercialization of electricity. Productivity growth rates in U.S. manufacturing in the 1920s were more than 5 percent per year, a rate that makes the “new economy” look laughable, at least for now.
But David’s research also suggests patience. New technology takes time to have a big economic impact. More importantly, businesses and society itself have to adapt before that will happen. Such change is always difficult and, perhaps mercifully, slower than the march of technology.
More recent research from MIT’s Erik Brynjolfsson has shown that the history of the dynamo is repeating itself: Companies do not do well if they spend a lot of money on IT projects unless they also radically reorganize to take advantage of the technology. The rewards of success are huge, but the chance of failure is high. That may explain why big IT projects so often fail, and why companies nevertheless keep trying to introduce them.
Brynjolfsson recently commented that the technology currently available is enough to fuel a couple of decades of organizational improvements. Even if technology stands still—it will not—there are already big changes stored up for us.